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CEC Entertainment Reports Financial Results for the Third Quarter of 2012

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IRVING, Texas--(BUSINESS WIRE)--

CEC Entertainment, Inc. (NYSE: CEC) today announced its financial results for its third quarter ended September 30, 2012. Total revenues for the third quarter of 2012 decreased 1.7%, or $3.4 million, to $196.6 million from $200.0 million for the third quarter of 2011. The decrease primarily related to a 2.3% decrease in comparable store sales, partially offset by additional revenues from six new stores opened or acquired since the end of the third quarter of 2011.

Net income for the third quarter ended September 30, 2012 decreased 33.3%, or $3.9 million, to $7.8 million compared to $11.7 million for the third quarter of 2011. Diluted earnings per share decreased to $0.45 per share for the third quarter of 2012 from $0.62 per share for the third quarter of 2011. The decrease primarily related to the decrease in net income.

For the first nine months of 2012, total revenues decreased 2.6%, or $16.9 million, to $625.7 million compared to $642.6 million for the first nine months of 2011. The decrease in total revenues was primarily related to a 3.1% decrease in comparable store sales, partially offset by additional revenues from six new stores opened or acquired since the end of the third quarter of 2011.

Net income for the first nine months of 2012 decreased 15.3%, or $8.0 million, to $44.2 million compared to $52.2 million for the first nine months of 2011. Diluted earnings per share decreased to $2.50 per share for the first nine months of 2012 from $2.70 per share for the first nine months of 2011. The decrease primarily related to the decrease in net income. Diluted earnings per share for the first nine months of 2012 benefitted approximately $0.20 from our repurchase of 2.7 million shares of our common stock since the beginning of 2011 fiscal year.

On October 30, 2012, the Company's Board of Directors declared a cash dividend of $0.24 per share, a 9% increase from our most recent dividend. This cash dividend is scheduled to be paid on December 27, 2012 to stockholders of record as of December 6, 2012.

Michael Magusiak, President and Chief Executive Officer, stated: “We are not pleased with our comparable store sales results for the third quarter and its impact on earnings. During the third quarter, we continued to test certain marketing strategies including a significant reduction in kid's television advertising weight levels and launched a digital media advertising campaign targeting moms. In retrospect, we believe we reduced media weight levels too deeply, which negatively impacted sales.”

Magusiak continued, “We have continued to revise our strategies to refresh our concept and have developed what we believe is a comprehensive strategic plan that will be fully implemented in 2013. Incorporated in our strategies is a strong marketing plan targeting both kids and adults with significant increases in our media buy, along with the implementation and communication of our value proposition. We remain optimistic about and fully-committed to our strategies, and continue to believe that when fully deployed our strategies will lead to comparable store sales increases, earnings growth and enhanced shareholder value.”

Business Outlook:

Given the uncertainty that surrounds our fourth quarter sales, including the ultimate impact of Superstorm Sandy in our lowest seasonal quarter, we are suspending guidance for the fourth quarter of 2012.

At this time we are providing guidance for fiscal 2013 of a 2%-3% increase in comparable store sales resulting in diluted earnings per share in a range of $2.80-$3.00, which includes an approximate increase of $5 million in advertising expense as compared to fiscal 2012.

We intend to further update you on our projections for sales and earnings on our year-end call in February of 2013.

Third Quarter 2012 Conference Call:

The Company will host a conference call Thursday, November 1, 2012, at 3:30 p.m. Central Time to discuss its third quarter financial results and our business outlook. A live webcast of the call (listen only) can be accessed through the Company's website, www.chuckecheese.com. Shortly after its conclusion, a replay of the call will be available on the website through Friday, December 21, 2012.

Non-GAAP Financial Measures:

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States ("GAAP"). From time to time in the course of financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP financial measures such as Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Free Cash Flow. The non-GAAP financial measures presented in this earnings release should not be viewed as alternatives or substitutes for the Company's reported GAAP results. A reconciliation of the most directly comparable GAAP financial measure to EBITDA and Free Cash Flow is set forth in a table accompanying this release.

About CEC Entertainment, Inc.:

For more than 30 years, CEC Entertainment has served as the nationally recognized leader in family dining and entertainment and the place Where a Kid can be a Kid®. The Company and its franchisees operate a system of 562 Chuck E. Cheese's stores located in 48 states and eight foreign countries or territories. Currently, 511 locations in the United States and Canada are owned and operated by the Company. CEC Entertainment, Inc. and its franchises have the common goal of creating lifelong memories for families through fun, food, and play. Each Chuck E. Cheese's features musical and comic robotic entertainment, games, rides, and play areas, as well as a variety of dining options including pizzas, sandwiches, wings, appetizers, a salad bar, and desserts. Committed to providing a fun, safe environment, Chuck E. Cheese's helps protect families through industry-leading programs such as Kid Check®.

Chuck E. Cheese's aims to promote positive, lifelong memories inside and outside of its stores. In addition to providing a fun entertainment experience for millions of families across the world, Chuck E. Cheese's has donated more than $7.7 million to schools and non-profit institutions through its fundraising programs. For more information, see the Company's website at www.chuckecheese.com.

Cautionary Statement Regarding Forward-Looking Statements:

Certain statements in this press release, other than historical information, may be considered “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks, uncertainties and assumptions. Statements that are not historical in nature, and which may be identified by the use of words such as “may,” “should,” “could,” “believe,” “predict,” “potential,” “continue,” “plan,” “intend,” “expect,” “anticipate,” “future,” “project,” “estimate,” and similar expressions (or the negative of such expressions) are forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Item 1A “Risk Factors” of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2012, filed on February 23, 2012. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected.

Factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to:

  • Our ability to successfully implement our business development strategies;
  • Unanticipated costs and delays in implementing our business development strategies;
  • Changes in consumer discretionary spending and general economic conditions;
  • Competition in both the restaurant and entertainment industries;
  • Increases in food, labor and other operating costs;
  • Changes in consumers' health, nutrition and dietary preferences;
  • Negative publicity concerning food quality, health, safety and other issues;
  • Continued existence or occurrence of certain public health issues;
  • Loss of certain key personnel;
  • Disruptions in the financial markets affecting the availability and cost of credit and our ability to maintain adequate insurance coverage;
  • Disruption of our commodity distribution system;
  • Our dependence on a few global providers for the procurement of games and rides;
  • Government regulations, litigation, product liability claims and product recalls;
  • Adverse effects of local conditions, natural disasters and other events;
  • Fluctuations in our quarterly results of operations due to seasonality;
  • Disruptions of our information technology systems;
  • Risks in connection with owning and leasing real estate;
  • Our ability to adequately protect our trademarks or other proprietary rights; and
  • Conditions in foreign markets.

The forward-looking statements made in this press release relate only to events as of the date on which the statements are made in this press release. Except as may be required by law, the Company undertakes no obligation to update its forward-looking statements to reflect events and circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

   
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share information)
 
Three Months Ended Nine Months Ended
September 30,   October 2, September 30,   October 2,
2012   2011   2012   2011  
   
REVENUES:    
Food and beverage sales $ 90,406 46.0 % $ 92,394

46.2

%

$ 291,190 46.5 % $ 304,530 47.4 %
Entertainment and merchandise sales   105,223 53.5 %   105,461 52.7 %   331,021 52.9 %   333,745 51.9 %
 
Total Company store sales 195,629 99.5 % 197,855 98.9 % 622,211 99.4 % 638,275 99.3 %
Franchise fees and royalties   921 0.5 %   2,142 1.1 %   3,512 0.6 %   4,340 0.7 %
 
Total revenues   196,550 100.0 %   199,997 100.0 %   625,723 100.0 %   642,615 100.0 %
 
OPERATING COSTS AND EXPENSES:

Company store operating costs:

Cost of food and beverage (exclusive of items shown separately below) (1) 22,627

25.0

%

23,196

25.1

%

71,863

24.7

%

74,186

24.4

%

Cost of entertainment and merchandise (exclusive of items shown separately below) (2)   7,703

 

7.3

 

%

  8,004

 

7.6

 

%

  23,848

 

7.2

 

%

  25,515

 

7.6

 

%

Total cost of food, beverage, entertainment and merchandise(3) 30,330

15.5

%

31,200

15.8

%

95,711

15.4

%

99,701

15.6

%

 
Labor expenses (3) 55,139 28.2 % 53,417 27.0 % 170,192 27.4 % 169,296 26.5 %
Depreciation and amortization (3) 19,872 10.2 % 19,939 10.1 % 58,702 9.4 % 61,597 9.7 %
Rent expense (3) 19,526 10.0 % 19,667 9.9 % 57,441 9.2 % 56,486 8.8 %
Other store operating expenses (3)   33,501 17.1 %   33,544 17.0 %   95,767 15.4 %   96,790 15.2 %
Total Company store operating costs (3) 158,368

81.0

%

157,767

79.7

%

477,813

76.8

%

483,870

75.8

%

 

Other costs and expenses:

Advertising expense 9,966 5.1 % 9,575 4.8 % 26,947 4.3 % 27,491 4.3 %
General and administrative expenses 12,931 6.6 % 10,799 5.4 % 39,635 6.3 % 38,078 5.9 %
Asset impairments   818 0.4 %   1,260 0.6 %   3,541 0.6 %   1,260 0.2 %
Total operating costs and expenses   182,083

92.6

%

  179,401

89.7

%

  547,936

87.6

%

  550,699

85.7

%

Operating income 14,467 7.4 % 20,596 10.3 % 77,787 12.4 % 91,916 14.3 %
 
Interest expense   2,031 1.0 %   1,581 0.8 %   6,085 1.0 %   6,621 1.0 %
Income before income taxes 12,436 6.3 % 19,015 9.5 % 71,702 11.5 % 85,295 13.3 %
 
Income taxes   4,642 2.4 %   7,365 3.7 %   27,525 4.4 %   33,061 5.1 %
Net income $ 7,794 4.0 % $ 11,650 5.8 % $ 44,177 7.1 % $ 52,234 8.1 %
 

Earnings per share:

Basic $ 0.45 $ 0.62 $ 2.51 $ 2.70
Diluted $ 0.45 $ 0.62 $ 2.50 $ 2.70
 

Weighted average common shares outstanding:

Basic 17,397 18,747 17,595 19,339
Diluted 17,473 18,799 17,652 19,379
Cash Dividends Declared Per Share $ 0.22 $ 0.20 $ 0.66 $ 0.60

___________________

Percentages are expressed as a percent of total revenues (except as otherwise noted).

(1) Percent amount expressed as a percentage of food and beverage sales.
(2) Percent amount expressed as a percentage of entertainment and merchandise sales.
(3) Percentage amount expressed as a percentage of Company store sales.

(Note - Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of cost of food and beverage and the cost of entertainment and merchandise may not sum to total due to the fact that cost of food and beverage and cost of entertainment and merchandise are expressed as a percentage of related food and beverage sales and entertainment and merchandise sales, as opposed to total Company store sales.)

   
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
 
September 30, January 1,
  2012   2012
ASSETS
 
Current assets:
Cash and cash equivalents $ 18,693 $ 18,673
Other current assets   62,609   62,008
Total current assets 81,302 80,681
Property and equipment, net 704,115 683,390
Other noncurrent assets   12,376   8,400
 
Total assets $ 797,793 $ 772,471
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Capital lease obligations, current portion $ 991 $ 834
Other current liabilities   86,770   82,854
Total current liabilities 87,761 83,688
Capital lease obligations, less current portion 20,220 10,075
Revolving credit facility borrowings 374,400 389,600
Other noncurrent liabilities   168,984   164,931
Total liabilities 651,365 648,294
 
Stockholders' equity   146,428   124,177
 
Total liabilities and stockholders' equity $ 797,793 $ 772,471
 
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended
September 30,   October 2,
  2012     2011  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,177 $ 52,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 59,257 62,101
Deferred income taxes 4,551 23,447
Stock-based compensation expense 5,630 5,479
Other adjustments 4,318 1,706
Changes in operating assets and liabilities:
Operating assets (2,076 ) 3,938
Operating liabilities   3,383     5,844  
Net cash provided by operating activities   119,240     154,749  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (75,597 ) (68,166 )
Acquisition of a store from a franchisee (234 ) -
Other investing activities   474     (178 )
Net cash used in investing activities   (75,357 )   (68,344 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving credit facility (15,200 ) (21,500 )
Dividends paid (11,829 ) (7,787 )
Restricted stock returned for payment of taxes (2,629 ) (2,749 )
Purchases of treasury stock (14,353 ) (55,445 )
Other financing activities   29     748  
Net cash used in financing activities   (43,982 )   (86,733 )
 
Effect of foreign exchange rate changes on cash   119     (64 )
 
Change in cash and cash equivalents 20 (392 )
 
Cash and cash equivalents at beginning of period   18,673     19,269  
 
Cash and cash equivalents at end of period $ 18,693   $ 18,877  
 

CEC ENTERTAINMENT, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Unaudited)

Net Income to EBITDA:
The following table set forth a reconciliation of net income to EBITDA and EBITDA expressed as a percentage of total revenues for the periods shown:

  Three Months Ended   Nine Months Ended
September 30,   October 2, September 30,   October 2,
  2012     2011     2012     2011  

 

(in thousands, except percentages)
Total revenues $ 196,550   $ 199,997   $ 625,723   $ 642,615  

Net income

$ 7,794 $ 11,650 $ 44,177 $ 52,234
 
Add:

Income taxes

4,642 7,365 27,525 33,061
Interest expense 2,031 1,581 6,085 6,621
Depreciation and amortization   20,049     20,123     59,257     62,101  
 
EBITDA $ 34,516   $ 40,719   $ 137,044   $ 154,017  

EBITDA as a percent of total revenues

17.6

%

20.4

%

21.9

%

24.0

%

 

The Company believes that EBITDA provides useful information to the Company, investors and other interested parties about the Company's operating performance, its capacity to incur and service debt, fund capital expenditures and other corporate uses.

EBITDA, a non-GAAP financial measure, is defined by the Company as net income before income taxes, interest expense, and depreciation and amortization. The non-GAAP financial measure presented in the table above should not be viewed as an alternative or substitute for the Company's reported GAAP results. EBITDA as defined herein may differ from similarly titled measures presented by other companies.

CEC ENTERTAINMENT, INC.
FREE CASH FLOW AND STORE COUNT INFORMATION

(Unaudited)

Free Cash Flow:
The following table sets forth a reconciliation of cash provided by operating activities to Free Cash Flow for the periods shown:

  Nine Months Ended
September 30,   October 2,
  2012   2011
(in thousands)
 
Cash provided by operating activities $ 119,240 $ 154,749
Less:
Capital expenditures and franchise acquisitions 75,831 68,166
Dividend payments  

11,829

  7,787
Free Cash Flow $ 31,580 $ 78,796
 

Free Cash Flow, a non-GAAP financial measure, is defined by the Company as cash provided by operating activities less capital expenditures, franchise acquisitions and dividend payments.

The Company believes that Free Cash Flow provides useful information to the Company, investors and other interested parties about the amount of cash generated by the business that, after the acquisition of property and equipment, franchise acquisitions and payment of dividends, can be used for other strategic opportunities, including servicing debt, funding additional capital expenditures and making investments in the business. It should not be inferred that the entire Free Cash Flow amount is available for discretionary expenditures. The non-GAAP financial measure presented in the table above should not be viewed as an alternative or substitute for the Company's reported GAAP results. Free Cash Flow, as defined herein, may differ from similarly titled measures presented by other companies.

Store Count Information:

  Three Months Ended   Nine Months Ended
September 30,   October 2, September 30,   October 2,
2012   2011 2012   2011  
 

Number of Company-owned stores:

Beginning of period 510 507 507 507
New (1) 2 - 7 2
Acquired from franchisees - - 1 -
Closed (1) (1 ) - (4 ) (2 )
End of period 511   507 511   507  
 

Number of franchised stores:

Beginning of period 50 48 49 47
New 1 1 3 3
Acquired by the Company - - (1 ) -
Closed -   - -   (1 )
End of period 51   49 51   49  

___________________

(1) For the three months ended September 30, 2012, new and closed stores include one relocated store. For the nine months ended September 30, 2012, new and closed stores include three relocated stores. New and closed stores for the nine months ended October 2, 2011, include one relocated store.

CEC Entertainment, Inc.
Tiffany B. Kice, 972-258-4525
Executive Vice President
Chief Financial Officer

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